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The Centre’s fiscal roadmap is expected to be one of the highlights of the Union Budget 2020-21, with analysts and investors keen to understand how it works out its expenditure plan amidst the economic slowdown.
While markets have already factored in some amount of fiscal slippage in 2019-20 due to the corporate tax rate cut, a lower goods and services tax mop-up, below expected disinvestment receipts and the overall slowdown, the big question now seems to be what kind of policy will be followed in the new financial year.
Finance Minister Nirmala Sitharaman is set to present the Union Budget 2020-21 on February 1, when she will announce the new revised fiscal deficit targets for 2019-20 and the new targets for 2020-21.
The Centre had pegged the fiscal deficit at 3.3 per cent of GDP in 2019-20. The Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement in the Budget documents had projected the deficit at 3 per cent in 2020-21 and 2021-22.
“Regarding markets, imminent slippage is largely factored in already given the extant revenue and expenditure trends. For currency markets, more focus is likely to be on the steps the government thinks are appropriate to spur growth, and especially how this could affect global investors,” said B Prasanna, Group Head - Global Markets, Sales, Trading & Research, ICICI Bank, adding that for bond markets, the prospect of slippage is not welcome, but largely built into expectations.
According to him, markets do expect more borrowing on the anvil for this year. “If the fiscal slippage registered in this Budget for this year or the borrowing target for FY2021 is much higher than expected, the bond market will react adversely for a while,” he noted.
Prasanna said he expects the Centre’s fiscal deficit to clock in at about 3.8 per cent of GDP in 2019-20 and at about 3.5 per cent next fiscal, with gross borrowing pegged at Rs 7.9 lakh crore to Rs 8 lakh crore.
A recent BofA Securities report expects the Budget to be positive for markets. “In our view, there is an argument for a ‘clean up’ – acknowledging the excesses and paying out all dues (leading to a significant expansion of deficits), but we think the government is more likely to keep the 2019-20 deficit under four per cent,” said the report, adding that for 2020-21, the government will have to decide between conservative or stimulative policy amidst revenue constraints.
Similarly, a report by HSBC Global Research also expects the deficit to be higher than Budgeted and pegged it at 3.8 per cent of GDP in 2019-20. “Adding some of the off-budget pressures, we find that the 'true' Central Government fiscal deficit in 2019-20 is around five per cent of GDP,” it said.
Noting that the next fiscal will be a challenging year, the report said, “The one-time special RBI dividend will not be around anymore, and room for extra borrowing is narrowing. Plans to strengthen the GST regime and large asset sales could lead to a slight consolidation, taking the fiscal deficit to 3.7 per cent of GDP in 2020-21.”
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